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									                                   Credit Management
                                      Finance 432
                                    Master Syllabus
                                Prepared by Kevin P. Prykull, CLP
                               Senior VP, PNC Equipment Finance
                                   Adjunct Professor of Finance
                                      Duquesne University
                                          October 2007

Course Description
      This course develops various analytical tools and techniques used to assess a potential
      borrower in light of extending both short and long term credit facilities. Comprehensive
      financial statement analysis methods are stressed in the course. In addition, students
      assess industry considerations, qualitative parameters and various loan structures in order
      to decision the credit. Loan portfolio issues are also be discussed and evaluated.

       Prerequisite: Business Finance 331

General Objectives
      The general objectives of Credit Management are to:
      1. help students understand the essentials of financial statement analysis
      2. evaluate companies from a credit/debt perspective
      3. highlight the commercial banking function and its loan products
      4. assess credit risk and mitigants
      5. evaluate risk/return tradeoffs and use credit assessment models
      6. understand the decision making process with respect to credit
      7. evaluate loan portfolio options and strategies
      8. gain a better and deeper understanding of financial statements
      9. refine students’ analytical abilities to prepare them for roles in credit management and
      10. deepen the financial acumen of class participants
      11. place the student in the role of the chief credit officer or lending officer at a financial
      12. complete a comprehensive credit analysis and underwriting of a firm and a loan
      13. utilize numerous real-life examples throughout to facilitate the learning process
      14. provide skills and an analytical framework that will benefit students even if they are
          not involved in commercial credit and lending functions
      15. apply financial skills and make credit decisions on a company’s loan requests

Specific Objectives
       Students completing Credit Management will be able to do the following:
       1. assess liquidity, cashflow analysis, different debt/capital structures, operational
           analysis, industry surveys, long term financial strength, and risk/reward trade-offs
      2. understand the objectives of financial statement analysis
      3. recognize the technical and interpretive dimensions of credit
      4. apply GAAP to the analysis of financial statements
      5. ascertain the accounting risk resident within a firm’s financial statements
      6. conduct industry assessment and relate to financial performance issues
      7. identify stages within the industry life cycle of the credit
      8. assess revenue of a firm via price and volume analysis
      9. examine sales concentrations and the potential concern for lenders
      10. conduct distribution and segment analysis of a firm’s operation
      11. calculate and then assess cost of sales and gross profit performance
      12. understand the difference between product costs and period costs
      13. focus on restructuring adjustments and noncash charges in financial assessment
      14. develop comprehensive understanding of core operating earnings and EBIT
      15. evaluate impact of discontinued operations, extraordinary gains/losses, and changes in
          accounting principles on the financial performance of a firm
      16. examine hidden expenses of small business operators
      17. identify various balance sheet structures and the impact on financing
      18. analyze current assets and the impact on the “quality” of a firm’s liquidity
      19. understand when cash is “not” liquid
      20. define working capital
      21. interpret an “aging of accounts receivable” for loan collateral purposes
      22. analyze quality of accounts receivable, including true trade ones
      23. compare LIFO vs. FIFO and its impact on credit analysis
      24. assess marketability of inventory
      25. develop an asset based loan profile using receivables and inventory as collateral
      26. identify which current assets have real “liquidity value”
      27. appreciate the importance of supplier financing to the credit process
      28. structure a line of credit facility to accommodate liquidity needs
      29. interpret terms and conditions of bank lines of credit including 364 day financings
      30. understand the role of commercial paper financing in a larger company’s short term
          financing arena
      31. examine long term assets and the role it plays in a company’s financial success
      32. look at capacity and efficiency issues of PP & E
      33. construct a term loan financing based on long term assets
      34. appreciate capitalized interest as it relates to construction in progress fundings
      35. evaluate intangible assets and look for hidden values
      36. adjust equity for goodwill
      37. evaluate long term investments and assess value (operating rights, patents, etc.)
      38. understand credit impact of investments valued under the equity and mark-to-market
          methods of accounting
      39. explain a firm’s long term financing strategy
      40. analyze the components of funded debt
      41. assess term loans and multi-year revolvers
      42. integrate bond financing into the credit granting process
      43. review and interpret Moodys, Fitch and S & P agency ratings and reports

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       44. integrate such ratings into corporate credit analysis
       45. assess a firm’s long term capital structure and identify possible structural issues
       46. understand operating vs. capital leases and the financial statement impact of leasing
       47. ascertain impact on risk by incorporating pension and other related obligations
       48. integrate subordinated debt into the financial structure of a firm
       49. understand the role of preferred stock
       50. treat mandatory redeemable preferred stock like debt
       51. know the intricacies of common equity financing
       52. evaluate a firm’s access to capital and the impact on credit and debt financing
       53. use a KMV model to assess risk
       54. balance dividend and stock repurchases against maintaining credit quality within a
       55. examine adjustments to equity that do not flow through the income statement
       56. address subsequent events and readjust financials to reflect current realities
       57. read and interpret footnotes; evaluate financial impact on firm
       58. calculate key financial ratios for inclusion in credit analysis
       59. integrate ratios into the assessment of a firm’s liquidity, debt, coverage, and
       60. calculate dupont and evaluate corporate performance
       61. calculate a firm’s net trade cycle and ascertain required working capital investment
       62. use industry ratios and conduct peer assessment of a credit
       63. develop a working sources and uses of cash
       64. examine the long and short cycle of cash as it relates to credit and lending
       65. analyze trends within a firm’s operating, investing and financing cashflows
       66. calculate EBITDA and reconcile to traditional cashflow
       67. ascertain a firm’s free cashflows and its ability to service debt
       68. reconcile differences between various credit reporting agencies
       69. use credit tools to assist in the credit granting process

Topic Outline
    Introduction to Financial Statement Analysis                                      5%
    The Accounting Connection                                                         5%
    Analysis of Operations                                                           10%
    Balance Sheet Analysis (Assets)                                                  10%
    Balance Sheet Analysis (Liab. and Equity)                                        10%
    Ratio Analysis                                                                    5%
    Short Term Liquidity                                                             20%
    Cashflow Analysis                                                                15%
    Long Term Financial Strength                                                     10%
    Long Term Debt Analysis                                                           5%
    Analysis of Equity                                                                5%

Teaching Procedure
      Given the nature of the material, classroom presentations must be well organized and
      revolve around “modules” of credit analysis materials. The course entails the integration

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       of an existing body of finance knowledge, accentuated by new learning. The goal is to
       integrate and apply such knowledge to make a credit decision on a firm. Homework and
       problems can be used in the early stages of the course to reinforce the classroom learning.
       Mini-cases and examples should be used in later stages of the course to integrate the
       theory into application. The final stage should be an individual or group project which
       requires comprehensive credit analysis and underwriting of a company. Real world
       “credit issues” should be introduced to the students throughout the course to best
       integrate and master the skills being taught.

      The following system may be employed with weights adjusted according to the
      instructor’s preference:
                             Exam # 1                                20-30 %
                             Exam # 2                                20-30 %
                             Project/Presentation                    35-45 %
                             Class Participation                      5-10 %

       There is really not an outstanding textbook that actually teaches the concepts of the
       course from a decision making perspective. However the text listed below is a good
       reference one that provides the students a foundation to build upon when used in
       conjunction with handouts and the coverage of various modules within class.
          Financial Statement Analysis by Charles H. Gibson

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